For U.S. stocks, Europe and Fed in driver’s seat

LOS ANGELES (MarketWatch) — Central-bank strategies will be the dominating forces driving U.S. stocks next week, with European policy makers looking for a high-court ruling on euro-zone bailout programs, and investors watching for word from the Federal Reserve about another round of stimulus.

Reports on retail sales and industrial production are slated for release next week, as is the expected launch of the next version of the iPhone by Apple Inc.
AAPL, -0.87%
whose share-price rally this year has contributed to a 20% run-up for the year to date in the Nasdaq Composite Index
COMP, -0.01%
Also from the corporate front, a midquarter update from Texas Instruments Inc.
TXN, -0.52%
and a monthly sales report from McDonald’s Corp.
MCD, +0.70%
are expected Tuesday.

But overall, as Europe’s long-running debt crisis lingers and the U.S. recovery appears stuck in low gear, the “market’s focus is right now is on the central bank of Europe and the central bank of the United States, and hoping that additional resources will be provided … that will allow the markets to continue their rally,” said Paul Nolte, managing director at Dearborn Partners in Chicago.

U.S. week ahead: iPhone 5?

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Next week's big events will kick off with Apple's Sept. 12 event, where many expect the new introduction of the iPhone 5. Laura Mandaro reports. (Photo: Bloomberg)

Next week’s marquee event will take place Wednesday, said Chris Konstantinos, director of international portfolio management at Riverfront Investment in Richmond, Va., when Germany’s constitutional court is expected to issue a ruling on the legality of the European Financial Stability Facility and the European Stability Mechanism. The EFSF is a temporary bailout fund and the ESM is the euro zone’s permanent-rescue fund.

“If the court rules that the stability mechanism is unconstitutional, at the very least that’s going to throw a pretty big monkey wrench in the near-term plan for any sizable bailout to get [European] sovereign-bond yields down,” he added.

The European Central Bank has other policy tools to bring Spanish and Italian bonds yields “back to reasonable levels,” according to Konstantinos, but an unfavorable court ruling will “potentially introduce a new level of uncertainty in the market” in the short run, he said.

U.S. equities rallied to multiyear highs Thursday after ECB President Mario Draghi outlined a plan for unlimited bond purchases aimed at curbing borrowing costs in debt-stricken euro nations. The Dow Jones Industrial Average
DJIA, -0.32%
marked its highest close since late December 2007. The S&P 500 Index
SPX, -0.23%
logged its best close since early January 2008 and the Nasdaq finished at its strongest level since mid-November 2000.

For investors looking for the Fed to launch a new round of stimulus measures, the prospects may have been bolstered by the disappointing August U.S. jobs report released Friday. The economy produced a meager 96,000 nonfarm jobs, below the consensus estimate of 125,000 jobs. The unemployment rate fell to 8.1% from 8.3%, but that reflected 368,000 people dropping out of the labor force. Read about the U.S. jobs report for August.

Fed Chairman Ben Bernanke signaled last week that he favors a third round of bond purchases, or quantitative easing, though he didn’t make a firm commitment. The Fed’s monetary-policy makers will conclude their two-day meeting on Thursday.

“I think [the Fed] will do something that’s stimulative in nature, whether it’s to extend the asset-purchase program now or to come up with something new,” said Michael Gibbs, co-head of the equity-advisory group at Raymond James.

But “if they do nothing, the market might not like it” and knock down stocks, particularly coming off the weak monthly jobs report that underscored the slow pace of jobs growth, he commented.

Nolte at Dearborn Partners said his view that the equity market will hold on to higher ground in 2012 stems from data that go back to 1950. There have been 22 years when the S&P 500 has logged double-digit gains in the first eight months, experienced mild corrections in September and October and ultimately finish higher for the year, he said.

This year, the benchmark index entered September up by 11.8%.

The S&P 500, along with the Nasdaq, has benefited this year from the nearly 70% surge in shares of Apple. Apple shares hit an all-time high north of $682 intraday Friday ahead of a company event scheduled in San Francisco for Wednesday. Konstantinos at Riverfront Investment said “as long-term Apple bulls,” they will be watching for Apple to unveil the next model iPhone, which many have been calling the iPhone 5.

“There’s a tremendous amount of interest … and on a certain level, for U.S. markets it matters. But I think it pales drastically in importance on a global scale compared with what gets decided in Germany next week,” he added.

Among U.S. data due next week, a July reading on consumer credit is set for release on Monday, and readings for consumer sentiment and core consumer prices will arrive on Friday.

Gibbs also believes most of next week’s economic releases will be trumped by the result of the Fed meeting and the ruling from the German constitutional court: “Everything else is a byproduct.”

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